“Is manufactured spending legal?” That’s one of the most common questions I get about manufactured spending. People often equate it to money laundering and assume it’s illegal. It took me aback the first few times I heard it, but it’s understandable that people who are unfamiliar with manufactured spending would think that.
It sounds shady and invokes images of a middle-aged high school teacher pondering ways to legitimize his meth fortune. So is manufactured spending illegal? Absolutely not. Do criminals use these methods to launder money? Yes, some do. But it’s not the method that’s illegal; it’s the purpose behind it, as well as the funding source.
Why people do it
Manufactured spending is a popular method of generating extra rewards from credit card spending. There are many different types of manufactured spending. The most popular method is buying Visa gift cards with a credit card, then unloading them via money order purchases.
You then deposit those money orders into your bank account and use the funds to pay off your credit card balance. The cost is minimal, allowing you to earn tons of points and miles for less. As you can imagine, criminals can leverage this method for money laundering, leading to questions about whether manufactured spending is legal or not.
Is manufactured spending money laundering?
There is a huge distinction between manufactured spending and money laundering. The IRS defines money laundering as follows:
“…activities and financial transactions that are undertaken specifically to hide the true source of the money. In most cases, the money involved is earned from an illegal enterprise and the goal is to give that money the appearance of coming from a legitimate source.”
Basically, money laundering refers to making illegally obtained funds appear legitimate – and it doesn’t just extend to gift card churning. Remember how in Breaking Bad Walter White bought a car wash to make his meth income seem legitimate? Owning a car wash isn’t illegal. Using it to make “dirty” money appear “clean,” is.
My semi run-in with the law
A few years ago I had a run-in with a Walmart Asset Protection Associate . The associate had been watching me and restricted my money order purchases at a different store. It became clear to me, based on past incidents, that he suspected I was doing something illegal. So I explained to him how I obtained my Visa gift cards and why.
It ultimately worked out because he was familiar with this hobby and believed my explanation. He pointed out that while it was ok for us to earn miles through gift card churning, he had to keep an eye out for criminals who utilized the same methods to cash out funds from stolen credit cards. In the end, I was allowed to continue buying money orders with Visa gift cards at this location because they understood I wasn’t using stolen funds to pay for them.
That’s really what it comes down to: Whether the funds utilized in the transaction are “clean” or not. In our case, we’re using Visa gift cards purchased with our own credit cards and then paying those cards off. Nothing about that is illegal, nor is buying money orders with a gift card.
My local Walmart store was fully aware of my manufactured spending activities and they were and ok with it. I was not violating their store policy and the funds I use to buy the money orders were legally obtained (i.e. via credit cards I paid off every month).
So the next time a family member or friend looks at your funny and utters the “m-word,” make the distinction for them: It’s not the method but rather the way funds are obtained that determines whether manufactured spending is illegal or not.
Is it illegal to buy gift cards with credit cards?
It’s not illegal to buy gift cards with a credit card. Most retailers accept credit cards for Visa gift card purchases, while some don’t. As long as you’re complying with the store policy, there’s nothing illegal about your gift card churning activities.
That being said, it’s worth noting that credit card companies have restrictions around issuing rewards on gift card purchases. American Express is notorious for clawing back welcome bonuses that were earned via gift card churning. Some banks even restrict point earnings on gift card churning.
So while manufactured spending is legal, it’s not always in line with retailer and credit card policies. So keep that in mind and proceed cautiously.
Manufactured spending legal risks
Manufactured spending is legal but carries several risks. For starters, it can result in carrying a large balance. This can negatively impact your credit score. Furthermore, if you don’t pay your balance in full every month, you may end up paying interest and fees. These added costs can off-set the value of the points and miles you’ve earned from manufactured spending.
Lastly, you might also run into trouble keeping track of all your gift cards from purchase to liquidation. If you lose just one gift card, you’ll be down $500 or more. So you should be organized and very careful when engaging in any kind of manufactured spending for points and miles.
The last thing you want is to hurt your credit or lose hundreds (or thousands) of dollars because of interest fees and lost gift cards.
Is manufactured spending worth it?
Despite the risks, manufactured spending is legal and worthwhile. You can earn thousands of bonus points at minimal cost and sometimes even turn a profit. But keep in mind that while manufactured spending is legal, there are restrictions and risks you should be aware of.
Familiarizing yourself with these rules and policies ensures you stay compliant and your manufactured spending is legal.
Do you often encounter people who think what you’re doing with gift card churning is illegal? How do you explain it to them?
This story was originally published on July 12, 2017. It has been updated with current information.
I tell people that if I do get arrested for this that I have more than enough points to get out of jail.
the first rule of fight club is…
Can you have one of the people at the WM that you take donuts to, take pictures of their handbook or get something in writing that says it’s not breaking their rules? I have two WM and they straight up told me it was against their policy and it’s in the handbook. They turn me away every time. I’ve tried to talk to Asset Protection and they are never present when I go. I’ve even left my number for them and a manager to call me and they never do.
Unfortunately every Walmart has its own rules. There are stores I can’t go to because they’ve decided they’re not ok with it.
There’s no reason for me to brag about how I accumulate points. I don’t explain it to anyone. The last thing I want is for people to know I’m often carrying around high value VGCs and MOs.
It’s not bragging, it’s educating someone who can impact your ability to keep accumulating points. In my case, it allowed me to increase my earnings significantly because there was no longer a barrier of suspicion when I walked into the store.
Just explain this to US Bank!
Do I need to keep all the used gift cards (that I have used to purchase MO) in case I might be audited by the IRS?
I don’t, but it’s totally your car. I feel like you should definitely keep the receipts just in case.
Obv there is no law prohibiting these transactions. You do aggressively violate the terms and conditions of your credit card agreements. As your card issuers allow you to continue, it is a safe bet that it believes your blog and hyping the products make it worthwhile. Who knows? But anyone using their cards in this manner does risk account closure along with family accounts. Companies choose who is worth the risk. So far, your banks are into it. There is not a morality component since card issuers make these decisions on a case by case basis. All that matters is the underwriting department believes your rewards program abuse is worthwhile bc it raises the profile of its products, etc.
running around to 50 Walmart s a day every day is a hefty and wasteful price to pay for a free first class seat. I would rather pay for the seat but it is all relative.
Why are you concerned with people telling you it is illegal or immoral? It is not. What is perhaps borderline immoral is that you pretend you are positively educating folks. You are educating them on how to risk account closure. Unless they are all bloggers with your readership, then your methods will not improve their lives. It is not your responsibility to take care of these people. If they are dumb enough to think they will enjoy the freedoms you do without financial risk and you are cool with that, then so be it. I would not feel right funding my lifestyle by giving out advice that harms the average person. The more people harmed, the more you uniquely benefit. Then again, all day in Walmarts and dollar stores and fighting with managers and driving from place to place sounds so unpleasant….
I don’t understand your argument: On one hand, I’m encouraging people to be irresponsible and on the other hand I’m it’s not my responsibility to take care of these “dumb” people? And I’d like to know in what way I’ve encouraged them to risk account closure. By encouraging them to ms responsibly? To spread spending across different credit cards? To not cycle their credit limits or use Walmart bill pay? I don’t “fund my lifestyle” giving ms advice, whatever that entails. I don’t know what blog you’re reading, but it doesn’t seem to be this one because your assumptions are way off.
What’s unclear? You are doing both. You encourage folks to violate the terms and conditions of their cardholder agreement. If they choose to take your advice without factoring in that they could face account closure, credit ramifications etc that is not your responsibility. To the extent that you feel badly that some poor family may be so uneducated with credit that your advice causes real ramifications, perhaps you should provide some additional content. Reading about the 90th time you cashed a money order at Walmart is boring anyway. Maybe an interview with the Walmart guys who approached you or a story about someone who experienced the downside of using their credit cards this way.
I’ve covered all of those topics. If you find reading about money orders boring and think that’s all I do, I don’t understand why you keep reading. Have a nice day Tom.
Ariana you know what’s not legal? Giving legal advice as a non-licensed attorney.
“It’s illegal to wear high heeled shoes in Carmle, CA without a permit.” I just did it again.
Arians, awesome tips and info. Thanks so much!!
Sure thing! Glad you think so.